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Monday, April 29, 2019

The New Non-Competition Laws in Massachusetts

One of the most debatable employment law issues in Massachusetts over the past decade or so has been changes to Massachusetts' laws regarding non-competition agreements.  Historically, employers loved them and employees (at best) tolerated them.  On August 10, 2018, Massachusetts Governor Charlie Baker signed new legislation in the form of Massachusetts General Laws chapter 149, § 24L into law.

Prior to the changes in the law, to be enforceable a non-competition agreement only needed to be supported by consideration, as non-competition agreements were believed to be necessary to protect an employer's legitimate business interests (such as confidential information or trade secrets).  Non-competition agreements needed to be reasonable in scope, in both duration and geographic area.

The new law (which applies only to non-competition agreements executed on or after October 1, 2018) has made significant improvements primarily for employees stuck with the limitations of non-competition agreements.  M.G.L. c. 149, § 24L applies to both employees and independent contracts working in Massachusetts.  While the law has a far reaching scope, it does not cover (a) non-competes in separation agreements, (b) no-hire provisions, (c) sale of business non-competition agreements, (d) assignment of inventions provisions, (e) non-solicitation provisions, and (f) non-disclosure agreements.  Non-competition agreements will not be considered enforceable against employees under the age of eighteen, employees who are terminated or laid off "without cause", undergraduate or graduate students employed as interns, and non-exempt (overtime eligible) employees under the FLSA (Fair Labor Standards Act).

The new laws contain certain requirements if a non-competition agreement is entered into at the time of hiring as well as during the employment.  At the time of hiring, a non-competition agreement must (1) be signed by both the employer and the employee, (2) state that employee has a right to consult with legal counsel prior to signing, and (3) be provided to the employee by either the formal offer of employment or ten business days prior to the hire date, whichever happens first.

If a non-competition agreement is entered into during the course of employment, the non-competition agreement must (1) be signed by both the employer and the employee, (2) state that the employee has a right to consult with legal counsel prior to signing, (3) be provided with ten business days' notice, and (4) contain additional fair and reasonable consideration (apart from continuation of employment).

One of the biggest changes (and most important to both employers and employees) is that there is now stricter limitations on time and geographic duration and scope.  Prior to October 2018, it was commonplace to see non-competition agreements to last for two years or more.  Now, a non-competition agreement cannot exceed a one year period, unless the employee breached fiduciary duty or unlawfully took possession of his or her employer's property, in which case the non-compete can extend for a period of two years.  The scope of the non-competition agreement can be no broader than is necessary to protect the employer's trade secrets, confidential information, and/or goodwill.  The geographic reach of a non-competition agreement is considered reasonable if it covers areas where the employee "provided services or had a material presence or influence" during last two years of employment.  The non-competition agreement is considered reasonable if it is limited to specified types of services that were provided by the employee during the last two years of his or her employment.

Of significance, Massachusetts has become the first state to include a "garden leave" provision in non-competition agreements.  The Massachusetts garden leave provision maintains that during the restricted period in which a former employee is barred from working for a competitor, the previous employer must continue paying at least fifty percent of the employee’s base salary.  Alternatively, the employer and employee could decided on a “mutually-agreed upon consideration” to replace the garden leave provision.

One issue that has come up a lot since October 1, 2018 is the enforceability of non-competition agreements in separation agreements.  Surprisingly, the new law specifically excludes coverage from "an agreement made in connection with the cessation of or separation from employment" (though the employee must be given seven business days to rescind acceptance).  However, it is unclear the level of enforceability of noncompete agreements that are reaffirmed as part of a termination letter.

There are clearly many questions that are raised by the new non-competition laws in Massachusetts:  What constitutes a termination "without cause"?  What constitutes “mutually-agreed upon consideration”?   When should an employer provide a non-competition agreement to an employee to make sure to follow the ten day rule?  When can an employee start work to ensure a valid non-competition agreement is in place?  How do these laws work with regards to oral contracts or promises?

The one thing the new legislation has made clear is that Massachusetts feels as though non-competition agreements had gotten too restrictive and too commonplace.  The message to employers is that the more reasonable a noncompetition agreement is, the more likely it will be upheld in court.

If you have any questions about employment law or your rights, please feel free to contact the Law Offices of Samuel S. Reidy for a free consultation.

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